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However,
it must also be noted that China is increasingly
investing in Research and Development (R&D),
according to the report. Spending on this
now accounts for almost two per cent of
the country's GDP.
"This
has yet to show up in increased innovation
and product sophistication," BCA says.
But
at the very least it would appear that the
government has its mind set on changing
this trend.
The
BCA report's authors believe that the key
to China moving up the value-added chain
lies in its ability to initiate reforms
in the public sector and promote innovation
for the private sector.
Working
in China's favour, the report adds, is the
entrepreneurial skill and dedication to
hard work of its people. Additionally, small
and medium sized companies are "very
flexible and nimble" when opportunities
arise.
"All
of this bodes well for a budding innovation
culture," it said.
Education
levels are also rapidly improving in China
with more Chinese nationals now studying
abroad, a fact that "will ultimately
help the nation's competitiveness".
These
students will not only return to China with
a high standard of education, but will also
benefit from the international exposure,
which will introduce them to new and innovative
ideas from the developed world.
Of
course there are still a number of issues
to watch. Already we looked at the BCA Research
authors' concerns regarding China's lagging
R&D capabilities. But this will hopefully
be remedied through increased spending and
ever improving education, both at home and
from abroad.
But
there are other factors that the report
refers to that must be addressed.
BCA
Research sees the stalled structural reforms
of the past few years as being a hindrance
to China's transition to a high-value goods
manufacturer.
It
notes that the most recent government, headed
up by President Hu and Premier Wen, spent
the past decade riding the "upwave
[sic] in the nation's growth that was created
by the structural reforms in the 1990s and
the WTO accession in 2001".
However,
a lack of reform since then, the report
says, augers for lower productivity and
lower overall growth going forward.
"In
contrast to the late 1990s and early 2000s,
when the public sector's influence in the
Chinese economy dropped substantially, the
role and the size of public sector and state-owned
companies have swelled in recent years.
In fact, since early 2009, China's growth
has been driven by massive credit expansion
that makes us very concerned about the economy's
medium-term outlook," it said.
The
authors add that much of this credit has
been filtered to state-owned and government-affiliated
companies, rather than the private sector.
BCA
Research believes that this has resulted
in "vast amounts" of misallocated
capital, which in turn could impact negatively
on the country's growth in the medium term.
The
report also points out that investments
in equipment and machinery has been declining
in recent years, while construction spending
has soared. This will also hamper China's
growth, it said.
The
bottom line, says these authors, is that
the country's policymakers will need to
"launch a new wave of reforms with
the purpose of curbing the role of the state
and public institutions in the economy and
encouraging more private investment in research
and development and innovation".
If
the new government can do this, then it
would appear that the concerns outlined
by the BCA Research report's authors, might
well be assuaged and China's path to moving
up the value chain will press ahead.
As
China stands at the crossroads today many
observers will no doubt be curious to see
whether it can take that next step. It has
already proven its strength in low-value
goods manufacturing. Will we now see the
second stage of China's growth story meet
with as much success as its first stage
did?
It
will be interesting to see.
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